Thread: Find the Annual Rate

Tracy is thinking about buying 100 shares of a stock selling for $15 per share. The stock pays no dividends. Her broker says that the stock will be worth $20 per share in 2 years. What is the annual rate of return on this investment?

Originally Posted by magentarita

Tracy is thinking about buying 100 shares of a stock selling for $15 per share. The stock pays no dividends. Her broker says that the stock will be worth $20 per share in 2 years. What is the annual rate of return on this investment?

Assume that you instead invest the money ($15000) at an annual rate r, then after 2 years this must be worth $20000 to be an equivalent investment, and r is the annual rate of return on the investment.

RonL

Can you break it down another way?

Originally Posted by Air

She buy's shares at $ so in total she pays:

$ $

In years, the value is $ so in total, her share value is:

$ $

So, over two years, she has had a profit as the stocks are worth more than she paid so she has earnt:

$ $ $

So, per annum ( year) this would be:

$

An annual interest rate will result in compounding annualy so you will not earn the same interest in each year.

RonL

Thank you so much. I got it now.